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Gayle Peterson

Area:

Social Finance

Speciality:

Poverty Alleviation

Expertise:

Wealth creation strategies to alleviate poverty

By Gayle Peterson

A Greater Human Touch is Needed

Since the start of the year, the world has seen India as the “rising giant” which will lead the way for developing nations and drive the world economy. Yet, despite progress, India continues to face challenges—poverty, toxic air pollution, lack to access to healthy food, water and education.

Impact investing, which harnesses business methods to achieve social good, is seen as one effective tool to achieve social change. Developing at breathtaking speed, India’s impact investing market is now the world’s largest in terms of number and size of investment. A 2010 study by Gray Ghost Ventures estimated that 30% of the global impact investing takes place in India.

Despite this growth, the field is still in its nascent stages, and Indian impact investors share many of the basic challenges and opportunities as their counterparts in other developing regions.

Like India, Latin America’s impact investment boom has resulted in more than 50 local and international players replacing the two or three of a decade ago, and capital committed by impact investment funds skyrocketing by a factor of 12 in the past five years. Similarly, East Africa has grown into a centre of global impact investing over the past five years, with 155 investors now operating 203 active investment vehicles in the region, and many more considering future commitments.

Developing regions share several traits: initial investments tend to concentrate in microfinance and financial services and later branch out to education, healthcare, water and renewable energy. The uneven geographic distribution of impact investments may be detrimental. In India, impact investors are concentrated in a few regions and perceived to exclude the eastern and north-eastern states. In Africa, almost half of the $9.3 billion in impact capital disbursed in the east has been in Kenya, more than triple the amount deployed in neighbouring Uganda and Tanzania. In Latin America, Brazil has the largest regional share, with $180 million invested by impact investment funds and organizations, both foreign and domestic, followed by emerging hubs in Mexico and Colombia with approximately $100 million and $50 million invested, respectively.

Indian impact investors must navigate structural and cultural issues unique to the national context. India’s impact investing is largely home-grown due to its long-standing effort to wean itself from external aid, receiving modest British contributions that are being phased out and US aid that has dropped 25% in five years. By contrast, 85% of Africa’s impact investments are made by external development financial institutions. Latin American impact investing was also driven by external actors in part because its regulatory regime is more open to outsiders, and it is geographically more accessible to North American investors than India. However, there are signs that the Latin American sector is moving towards the Indian example, for good reason: although foreign-based funds still out-invest local funds nearly three to one, local impact funds invest in a greater number of projects, often provide capital at earlier stages in the social business venture cycle, and are better able to navigate local legal and regulatory challenges.

Further, there are internal structural differences among regions that shape the impact investing sector. A key challenge across Africa, for example, is that despite a profusion of non-profits and social enterprises, local financial structures often are not up to the challenge of structuring deals and providing adequate funds. Conversely, although India boasts a strong and complex financial sector and many of the world’s leading corporations, investors often lack confidence in the soundness of potential investee organizations.

The Indian government is the largest actor in the social investment landscape, driving funding through its regulatory framework, and as the biggest spender domestically. While this involvement magnifies the importance of improving the state’s transparency and efficiency, such drawbacks are preferable to the extreme government instability that increases risk for many African investors.

India is leading the way in the evolving impact investment world. With the energy and excitement comes caution for investors:embrace risk and recognize that there will be stumbling blocks when dealing with the world’s greatest problems. Efforts will fail. Talk about them openly and learn from each other. Listen to, partner with, and learn from the communities and people you serve. Value human, social, environmental capital as much as financial assets.

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